Plaza Multilateralism + MAC Dynamism = Multilateral MAC?

Question: Could the Plaza Accord's multilateralism be combined with the dynamic adjustments of the Market Access Charge (MAC), thus providing a tool that would attract multilateral support and create economic balance not just in America, but around the world?

Short Answer: Absolutely. Doing this would provide an internationally-agreed policy like the the Plaza Accord, but instead of being static, it would be dynamic like the MAC, continuously adjusting exchange rates to assure balanced trade when inflation and productivity rise at different rates across countries.

Bretton Woods and Plaza Accord – The Good and the Bad

Good – Multilateral, not Unilateral: The Plaza Accord of 1985 that arranged a devaluation of the US dollar and a parallel revaluation of Japanese and German currencies was based on international discussions and agreements, providing the basis for more balanced trade.

Bad – Static, not Dynamic: However, the Plaza Accord's effectiveness only lasted for five years – just long enough for America to balance trade in 1990 for one year. After that, our trade deficits resumed and have continued ever since. Unfortunately, the static one-time exchange rate adjustment that the Plaza Accord achieved did not keep up with changes in international markets. In contrast, the MAC will adjust the dollar's exchange rate as needed to maintain balanced US trade forever – regardless of what happens in other countries.

Market Access Charge (MAC)  – The Good and the Improvable

Best MAC Features:  The MAC focuses on the balance of financial flow on the financial account as well as on the balance imports of and exports of goods and services on the current account. Including financial flows is critically important. Why? Exchange rates today are determined primarily by the balance of inflows and outflows of money on the financial account, not by the balance of imports and exports of real goods and services on the current account – the situation for hundreds of years prior to the explosion of international financial flows starting around 1970. This Great Paradigm Shift in exchange rate determination has been overlooked by most economists and policy makers. Hence our serious and growing global trade deficits.

Improving the MAC: As currently designed, America would apply the MAC unilaterally on all inflows of foreign-source money. While this unilateral implementation is perfectly legal under  IMF rules, it could trigger resentment, even retaliation, by other countries. Thus, we should immediately implement the MAC, by Executive Order if necessary, to save America, then expand its appeal and impact with a voluntary multilateral MAC agreement.

Reasons to be Optimistic about a Multilateral MAC

America is not the only country that has been suffering from trade deficits. In 2010, during the height of the European Debt Crisis, over half of OECD countries had trade deficits, and the Mediterranean countries (Greece, Italy, Spain, and Portugal) experienced such severe crises that they could well have collapsed except for massive bailouts from the IMF and the EU.

The main cause of their crises was excessive inflows of money, primarily from Germany. Between 2010 and 2011, for example, Germany's surplus was over 83% of their total deficits, and existing German reserves may well have financed the remainder.  

Summary: Like the U.S., European countries could benefit greatly from having a MAC. Implemented on a multilateral basis, it would make a major contribution to balanced trade and sustainable growth based on rising productivity, not debt, for America, for Europe, and by extension for the rest of the world. Also, a multilate­ral MAC would avoid the risk of America appearing to be serving only its own national interests.

America Needs a Competitive Dollar - Now!

Should the MAC Tax Different Financial Inflows Differently?

Question: Some have suggested that the MAC should tax inflows of foreign-source money differently depending on its origin, ownership, currency, liquidity, form, proposed use, etc. For example, the version of the MAC that was presented to the Senate in 2019 exempted foreign-source money that was deposited in the United States in short-term accounts not paying interest. Does this differentiation make any sense?

Short Answer: Absolutely not.

Explanation: Money in one form can usually be converted almost instantly into money in a different form – and this can happen repeatedly with a single inflow. If exemptions from the MAC are made for one form of money (e.g. short-term funds in no-interest checking accounts), all money flowing into the United States will enter as short-term funds deposited in no-interest foreign currency checking accounts, then be converted (in ways that can be impossible to trade) into, for example, US dollars that are used to buy US assets, both financial and real, such as stocks, bonds, and real estate.

Other countries have tried to differentiate between "good capital" and "bad capital," but such schemes almost always fail because those involved can usually evade capital flow management instruments such as the MAC by getting their "bad" capital reclassified as "good" capital.

Offering exemptions or preferential rates for some foreign-source inflows and not for others would almost certainly destroy the MAC's effectiveness because:

(a) the MAC would have little or no impact on foreign demand for dollars and dollar-based assets;

(b) global demand would continue to drive the U.S. dollar above rates consistent with balanced trade;

(c) the overvalued dollar would continue to cause US trade deficits; and

(d) America would continue to suffer the serious consequences of imbalanced trade.

The costs of imbalanced trade include, for example, lost jobs, closed factories, excessive dependency on global supply chains that collapse under pressure, increasing income inequality, social and political polarization, loss of global technological and industrial leadership, and growing debt to foreign countries – debt that is turning America into the "Squanderville" that Buffett wrote about so pointedly nearly twenty years ago.

Conclusion:

All money coming into America from foreign sources should be taxed at a standard MAC rate regardless of currency, form, avowed purpose, etc.

P.S. If any exemptions are to be allowed – for example, money borrowed abroad by the US Government through the sale of Treasuries, or money used to pay for US exports– they should be granted on a rebate basis. The foreign-source money would pay the standard MAC charge upon entry, but as soon as the funds have been delivered to Treasury, or the exports have been shipped and certified by US  Customs, the MAC charge would be rebated with market interest. This rebate approach would minimize the risk of fraud.

America Needs a Competitive Dollar - Now!